Australian dollar forecast: Will AUD outperform in 2023?
AUD faces headwinds on economic growth concerns. What’s next for the Australian dollar?
The Australian dollar (AUD) hit an over four-month high against the US dollar (USD) in January 2023 as greenback weakness extended into the new year on expectations of slower interest rate hikes by the US Federal Reserve (Fed). In January AUD/USD was up 3%, however in February it dropped by over 4% and then again by 5% in March.
At the time of writing on 14 April, AUD/USD stood at about 0.673, having retreated slightly from the 0.7 range – its highest level since late August 2022.
So, it seems that the AUD is back on a downwards slope after a respite in January.
How will AUD/USD trade in 2023? Let’s learn the basics about the Australian dollar and take a look at the latest Australian dollar forecasts for 2023 and beyond from analysts.
AUD/USD live exchange rate
About AUD: Australian dollar vs global peers
In 2022, there was a fluctuation in the price of AUD, with ongoing global crises affecting the market significantly.
The RBA said that Australia had a floating exchange rate, “meaning the movements in the Australian dollar exchange rate are determined by the demand for, and supply of, Australian dollars in the foreign exchange market”.
The key drivers for the AUD's performance are interest rates and inflation data and aganist the USD, which has expereinced higher interest rates and inflation compared to Australia, the AUD fell at a steady rate for most part of 2022.
Data from Westpac, the Australian dollar was 0.738 cents to the US dollar in March 2022. In April, 0.736; May, 0.705; June, 0.702; July 0.686; a slight increase in August to 0.696; and back down significantly to 0.667 for the month of September.
Back in March 2020, the Australian dollar crashed to its lowest point against the US dollar in over 18 years, as the Covid-19 pandemic pushed the world into lockdown. The Aussie lost over 12% in the first quarter of 2020.
Having bottomed at a near two-decade low of 0.55 against the US dollar in March 2020, the Aussie would see a stellar rebound over the next 12 months.
The AUD/USD rate surged about 45% from its March 2020 bottom to a near three-year high of 0.8 by February 2021, supported by recovering commodity and energy demand outlook.
Since then, the Aussie has been on a steady decline against USD, weighed down by a number of factors including the Chinese real estate sector crisis, Australia-China tariff wars and an aggressive rate hike cycle by Fed.
In contrast, the US dollar index (DXY), which tracks the performance of the USD against a basket of major currencies, rose to its highest level in 20 years on the back of aggressive interest rate hikes from the US Fed.
In September 2022, AUD posted a monthly loss of 6.4% against the greenback, its worst monthly performance in over nine years. By 13 October 2022, AUD/USD fell to 0.6169, its lowest since April 2020.
Most global currencies rose from their bottoms against the US dollar in November 2022 after October US inflation data came in lower than expected. The market moved quickly to price in a slower pace of US Fed rate hikes going forward.
AUD posted its best monthly return in more than two-and-a-half years in November 2022 by gaining about 6.1% against the USD. AUD closed the year on a strong note as the Aussie saw back-to-back monthly gains over the greenback in the last two months of 2022.
Despite the late gains, however, AUD/USD closed the year about 6% lower in 2022 at 0.681.
When compared to major currencies, the Aussie posted positive returns against the British pound and the Japanese yen in 2022. AUD/EUR remained close to flat.
In 2022, AUD/EUR slipped 0.4%, AUD/GBP rose 4.8% and AUD/JPY increased about 6.8%.
AUD extended its outperformance against USD in 2023 with AUD/USD rates gaining 1.3 year-to-date (YTD) as of 20 February.
AUD drivers: RBA expected to hike rates further
As mentioned, the key drivers for the AUD's performance are interest rates and inflation data. Although the RBA’s monetary policies were overshadowed by the ultra-aggressive US Fed and global recession concerns in 2022, the duration of the current Australian rate hike cycle will be critical for the AUD forecast for 2023 and beyond.
Having conducted 10 rate hikes between May 2022 and March 2023, the Reserve Bank of Australia (RBA) raised rates again in March when the central bank raised its cash rate at its monthly board meeting by 25 basis points to 3.6%, the highest level since mid-2012.
“The board expects that further tightening of monetary policy will be needed to ensure that inflation returns to target and that this period of high inflation is only temporary,” the RBA governor, Philip Lowe, said in a statement.
“In assessing when and how much further interest rates need to increase, the board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.”
The RBA hiked rates by 25 bps in its last meeting on 7 February 2023, as expected by markets and predicted by ING Group's economists. ING saw Australia’s interest rates peaking at 3.6%, up from the current rate of 3.1%, as of 6 January 2023.
Rabobank’s Jane Foley pointed out that the latest Australian labour market reading – which showed employment unexpectedly dipped in December 2022 – may cause policymakers to slow down monetary tightening. She commented on 19 January 2023:
On 16 February, ING Group economists highlighted that Australia's wage price index may provide further direction for policymakers, and likely influence the AUD/USD rate:
"If the wage price index grew by 1.0% in the fourth quarter from the third – as it did in the third quarter from the second, the index would finally reach 3.5%. Although this very lagging data point is mainly of academic interest, a rising number would still encourage hawkish rhetoric from the RBA."
Australia’s inflation highest in over three decades
Analysts expected inflation to remain the near-term focus for most central banks including the RBA.
Although price pressures in Australia have come off peak levels, annual inflation still remained uncomfortably high. The current annual inflation rate in Australia is 7.8%, according to ABS data released on 25 January 2023.
The RBA reiterated its inflation-fighting stance in its March monetary meeting, saying that it will do “in assessing when and how much further interest rates need to increase” to return inflation to the central bank’s target band of 2% to 3%.
“Inflation will remain a key focus for the RBA. But activity indicators will be a guide to the extent that demand and hence inflationary pressures are abating,” said ANZ Research.
Economic slowdown concerns
The looming threat of a global recession played a central role in AUD weakness in 2022. The theme is likely to continue in 2023.
Australia has avoided the worst effects of a recession for almost 30 years but 2023 may be the year of a recession - if inflation keeps rising.
With GDP on an upward trajectory by 0.6 per cent and unemployment at an all-time low at 3.5 per cent - the Australian economy is regaining positive momentum. But the focus is to drive down inflation.
In October 2022, the Australian government published its federal budget wherein the government cut its long-term iron ore price assumptions from $91 per tonne to $55 per tonne, underscoring the weakening in demand for Australia’s largest export. The budget said:
The next Federal budget is due for May 2023, and the BDO, a leading Audit and Accounting organisation it is anticipated that the May 2023 budget will be more substantive.
The BDO said:
On a positive note, China’s U-turn on its zero-Covid policy and the recovery of the Chinese property sector are expected to help Australian exports, which are key to its economy.
“Recessions in the US and Europe will weigh on global growth in 2023 and, in turn, on Australia’s external accounts. But a recovery in China will be positive. The iron ore price has been a beneficiary so far, but Australia’s tourism and education exports will get a sorely needed boost if easing Covid restrictions in China boost travel abroad,” said ANZ Research.
Australian dollar forecast for 2023 and beyond
ANZ Research said in its AUD prediction:
The research firm added that it expected AUD to be an “outperformer” among commodity currencies in 2023, and saw the “dollar dominance theme” reducing as global inflation moderates.
Elsewhere, ING’s Australian dollar forecast for 2023 saw the AUD/USD exchange rate at 0.71 by the fourth quarter of the year, as of 13 December.
In her AUD/USD forecast, Rabobank’s Jane Foley said on 19 January that the bank saw risks that AUD/USD could fall back to the 0.67 level in the next three months “on a combination of US recession concerns, a still hawkish Fed and expectations that the RBA is close to a peak policy.” The analyst added:
WalletInvestor’s algorithm-based Australian dollar forecast for 2025 as of 20 February saw the AUD/USD exchange rate closing the year at 0.691. WalletInvestor did not give an Australian dollar forecast for 2030 – the closest forecast to that date amounted to a potential rate of 0.7048 in late February 2028.
Economic data aggregator TradingEconomics expected the Australian dollar to be priced at about 0.62626 against the US dollar in early 2024.
Note that analysts and algorithm-based Australian dollar forecasts can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence. Remember that your decision to trade or invest should depend on your risk tolerance, expertise in the market, portfolio size and goals, and never trade money that you cannot afford to lose.